NUCOR CORP 10-Q Summary: Period Ended July 5, 2003
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended July 5, 2003, and the six-month period ended on the same date. Nucor Corporation operates in two primary segments: Steel Mills (carbon and alloy steel) and Steel Products (joists, deck, fasteners, etc.). The company reported 78,206,291 shares of common stock outstanding as of the period end.
Key Financial Metrics
| Metric | Six Months Ended July 5, 2003 | Six Months Ended June 29, 2002 | Three Months Ended July 5, 2003 | Three Months Ended June 29, 2002 |
|---|---|---|---|---|
| Net Sales | $3,000.7 million | $2,278.7 million | $1,520.5 million | $1,198.0 million |
| Net Earnings | $26.2 million | $80.0 million | $8.4 million | $59.7 million |
| Diluted EPS | $0.33 | $1.02 | $0.11 | $0.76 |
| Gross Margin | ~5% (6 months) | ~10% (6 months) | ~4% (3 months) | ~11% (3 months) |
| Operating Cash Flow | $206.8 million | $303.7 million | N/A | N/A |
| Capital Expenditures | $94.1 million | $76.5 million | N/A | N/A |
| Long-Term Debt | $878.6 million | $878.6 million | N/A | N/A |
| Cash & Short-Term Investments | $182.3 million | $219.0 million | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 32% for the six months and 27% for the quarter compared to the prior year. This was driven by a 29% increase in tons shipped (6 months) and a 2% increase in average sales price per ton.
- Profitability Decline: Despite revenue growth, net earnings dropped significantly (67% for 6 months, 86% for the quarter). Gross margins compressed from ~10-11% in 2002 to ~4-5% in 2003.
- Cost Pressures: Raw material costs rose approximately 21-22% year-over-year. Scrap costs increased 25% for the six-month period. Energy costs also rose.
- Operational Disruptions: Pre-operating and start-up costs surged to $60.2 million (6 months) due to equipment failures at the Decatur, Alabama sheet mill and unanticipated downtime at the Hertford County, North Carolina plate mill.
- One-Time Income: Other income decreased significantly due to the absence of a $29.9 million anti-trust settlement received in the prior year (only $2.3 million received in the current period).
- Tax Rate: The effective tax rate decreased to 18.4% (6 months) from 33.6% in the prior year, partially offsetting the decline in pre-tax earnings.
Guidance, Outlook, and Risks
- Capital Expenditures: Projected to be less than $300 million for the full year 2003.
- Liquidity: Management expects funds from operations and existing credit facilities to meet requirements for at least the next 24 months. The current ratio remains strong at 2.4.
- Acquisitions: Completed the acquisition of the Kingman, Arizona facility from North Star Steel for approximately $35 million in March 2003.
- Stock Repurchases: Directors approved a program to repurchase up to 15 million shares; no repurchases occurred in the first half of 2003.
- Risks: Key risks include sensitivity to steel prices, raw material costs (scrap), energy costs, global economic uncertainty, trade policy changes (tariffs), and the cyclical nature of the steel industry.
- Contingencies: Accrued environmental costs totaled $62.1 million, with a reduction in reserves of $3.1 million during the first half of 2003 due to revised estimates.
Investor Verification Checklist
- Margin Compression: Verify the sustainability of the 4-5% gross margin given the 20%+ increase in raw material costs.
- Operational Recovery: Confirm the resolution of equipment failures at the Decatur sheet mill and Hertford County plate mill and their impact on future production capacity.
- Start-up Costs: Monitor if pre-operating costs for new facilities (Decatur and Crawfordsville) stabilize in subsequent quarters.
- Debt Levels: Review the impact of increased interest expense on future earnings as long-term debt remains at $878.6 million.
- Environmental Reserves: Track changes in the $62.1 million environmental accrual, particularly regarding the Nucor-Yamato Steel Company joint venture.